Cash America and the Structure of Bondholder Remedies

26 Pages Posted: 26 Jun 2018 Last revised: 1 Aug 2018

See all articles by Mitu Gulati

Mitu Gulati

Duke University; University of Virginia School of Law

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Date Written: June 11, 2018

Abstract

Exit provisions have long been a sleepy and uncontroversial part of the corporate bond boilerplate. That changed in September 2016, with the Wilmington Savings v. Cash America decision. There, in response to a covenant violation by a solvent debtor, a US federal court ruled that bondholders didn’t just have the standard right to accelerate the debt, but were entitled to the “make-whole” premium that the debtor would have had to pay had it exercised its option to redeem the bonds. The decision caused consternation in the corporate bar on the grounds that the interpretation was orthogonal to market understandings. The result: a quick and concerted effort from a number of elite law firms to revise the standard remedy clauses in bond indentures. But it failed. By examining exit provisions in the context of the larger architecture of a corporate bond, we seek to understand why investors might have resisted the attempts to contract out the Cash America interpretation of the remedy clauses.

Keywords: Corporate Bonds, Acceleration, Make-Whole, Redemption, Boilerplate

JEL Classification: G32, G33, K12, K22

Suggested Citation

Gulati, Mitu and Gulati, Mitu and Kahan, Marcel, Cash America and the Structure of Bondholder Remedies (June 11, 2018). Duke Law School Public Law & Legal Theory Series No. 2018-44, NYU Law and Economics Research Paper No. 18-25, Available at SSRN: https://ssrn.com/abstract=3194055 or http://dx.doi.org/10.2139/ssrn.3194055

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

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Duke University ( email )

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Marcel Kahan

New York University School of Law ( email )

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212-995-4341 (Fax)

European Corporate Governance Institute ( email )

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Belgium

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